Borrowers hit by loan insurance rip-off
THE SUNDAY TIMES - 15TH MAY 2005
Consumers are paying almost £4billion a year for insurance to protect their loan repayments even though the cover could be worthless for many borrowers.
Banks and building societies rake in vast profits by flogging payment protection insurance on mortgages, personal loans and credit cards. The policies are supposed to cover your loan repayments, typically for a year, if you lose your job or are unable to work due to ill health.
But experts have warned that the insurance is often mis sold to borrowers who may never be able to lodge a successful claim, perhaps because they are self employed or have existing medical conditions.
Some consumers do not realise that they are forking out hundreds of pounds a year for the insurance. Companies often flout industry rules by automatically adding cover to the loan, without asking if it is required.
Last week, Vincent Cable the Liberal Democrat shadow chancellor, called on the Office of Fair Trading to investigate rip-off premiums for payment protection insurance.
If you buy mortgage cover from a high street lender, it may cost up to twice as much as the cheapest policies on the market. And most of your premiums are creamed off in commission rather than used to pay claims.
Cable said: “There is clearly a serious consumer scam operating in the industry. The big banks and some brokers are taking advantage of weak rules, which do not require the disclosure of commissions to charge outrageous premiums.
Suppose you have a £100,000 mortgage with repayment of £570 a month. A high-street lender might charge £33 a month, or £397 a year, for insurance to cover your repayments. But the lender might take 85% or £28 in commission. Brokers typically take commission of about 20%.
Simon Burgess of Burgesses Limited, an insurance broker, said: “The premiums on many protection policies are nothing short of a scandal. Many borrowers would be better off keeping their money and using it to reduce their mortgage debt.”
The Financial Ombudsman Service, which deals with disputes between consumers and companies, receives around 1,000 complaints a year about protection insurance, often because the policy was mis-sold to a borrower who was in eligible for cover, perhaps because he or she was self employed or on a short term contract. Lender are required by an industry code of practice to find out if policies are suitable, but the rules are routinely flouted, according to a survey by the Mortgage Advisers Association.
It called the country’s top 10 mortgage lenders to obtain a quote for a home loan. When mortgage payment protection insurance was included in the price, the lender explained what it would cover in only 19% of cases.
No callers were asked about their medical history or were told existing medical conditions would be excluded. Only a third of callers were asked for any employment details even though there are a number of exclusions from unemployment cover.
If you are self-employed, policies will usually pay out only if you wind up your business and report this to the Inland Revenue; they are unlikely to cover your loan repayments simply because you are out of work. Policies typically demand that contract workers have been employed by the same firm for two years and had their contract renewed at least once.
Even in you have a permanent contract most policies will not pay out for up to 60 days after you have made a claim? Brian Brown of Defaqto, a financial research company, said: “I would question the need for unemployment cover. Many people are back in work within three to four months.”
Protection policies also carry exclusions that make it difficult to claim if you are off work due to ill health. Brown said: “The biggest causes of absence from work are stress and backache, but there may be restrictions on payouts for these conditions.
For example, a policy may cover absence from work due to backache only if there is evidence from a hospital, such as a sc an. It is not enough for your GO to have recommended that you take time off work.
Remember that your employer may offer you full or half pay for three to six months if you are off work because of ill-health.
